The Banking Acts of 1826 banned the issuance of bank notes of less than 5 pounds and ended the Bank of England’s 100-year monopoly on joint-stock banking.
The Act of 22 March 1826 put an end to notes of less than 5 pounds and required the redemption of the smaller notes by 5 April 1829. Apparently the number of people hanged for the capital offense of forging notes, even small ones, was one thing that moved Parliament to act. Scotland, where 1 pound notes were highly popular, was exempted from the act. Before the act passed Parliament, the eminent author Sir Walter Scott had written letters to the Edinburgh Weekly Journal that ridiculed the abolition of small notes in Scotland. Another prominent Scot, Adam Smith, in the Wealth of Nations, had argued against the issuance of small notes in 1776, observing:
Where the issuing of bank notes for such very small sums is allowed and commonly practiced, many mean people are both enabled and encouraged to become bankers. A person whose promissory note for five pounds, or even for twenty shillings, would be rejected by everybody, will get it to be received without scruple when it is issued for so small a sum as sixpence. But the frequent bankruptcies to which such beggarly bankers must be liable may occasion a very considerable inconveniency, and sometimes a very great calamity to many poor people who had received their notes in payment.
Arguments in favor of small notes cited the conservation of precious metal reserves when precious metal was no longer needed as a circulating medium. Scotland continued to circulate 1 pound notes throughout the nineteenth century, while Britain relied upon the gold sovereign coin to circulate as the 1 pound piece. Subsidiary silver coinage gradually replaced the role played by the small notes.
The Act of 26 May 1826 ended the Bank of England’s monopoly on joint-stock banking. In addition to giving the Bank of England a monopoly on joint-stock banking, an act of 1707 had prohibited banking partnerships with more than six members from engaging in the banking business. Small-scale partnerships dominated English banking in the countryside, while the Bank of England enjoyed a preeminent position within a radius of 65 miles around London. Joint-stock banks were organized as modern corporations, affording the owners (stockholders) the protection of limited liability. Unlike corporations, partnership banks, in the event of bankruptcy, exposed all the personal assets of partners to the demands of creditors. Scotland had pioneered the proliferation of joint-stock banking, but England had tended to reserve to the Bank of England the exclusive privilege of joint-stock banking.
The Act of 1826 preserved the Bank of England’s monopoly on joint-stock banking within a 65-mile radius of the center of London, but outside the London area it authorized the establishment of note-issuing banking corporations with an unlimited number of partners. To compensate for its loss of privilege, the Bank of England was authorized to set up branches anywhere in England or Wales. The Bank of England promptly opened branches in major cities, and for a while England flirted with the Scottish system of banking that emphasized competition between note-issuing incorporated banks. The Banking Act of 1833, however, made the Bank of England’s notes legal tender, and the Bank Charter Act of 1844 marked a sharp shift toward a policy of concentrating note-issuing authority with the Bank of England.